Core Supplier of Military Embedded Computers, Comprehensive Product Line Drives Continuous Development
The company has focused on the research and development of military embedded computer products since its establishment, providing customized products and solutions based on customer needs and mastering the core technologies of various military embedded computer modules.
The company’s products are mainly used in airborne, missile, vehicle-mounted, and shipborne weapon systems, covering data acquisition, signal processing, data processing, communication switching, interface control, high-reliability power supply, large-capacity storage, and graphics image processing. These products are embedded within weapon systems in the form of modules and plugs, completing various military tasks such as reconnaissance, communication, countermeasures, search, identification, targeting, and attack, thereby enhancing the intelligence and combat effectiveness of the weapons.
The company is involved in the hardware layer, driver layer, and application layer of embedded computers.Embedded computers can be divided into four layers: hardware layer, driver layer, operating system layer, and application layer. The company mainly completes the design and production of the hardware layer, as well as the design and programming of the driver and application layers.
Compound annual growth rate of 53.2% from 2017 to 2020, with expectations of continued high growth in 2021
In 2020, the company achieved operating income of 325 million yuan, a year-on-year increase of 24.6%, with a compound annual growth rate of 23.87% from 2017 to 2020; net profit attributable to shareholders was 86 million yuan, a year-on-year increase of 43.9%, with a compound annual growth rate of 53.20%. In recent years, the performance has shown a rapid upward trend. The mid-year report for 2021 forecasts a net profit of 31.93-41.51 million yuan, a year-on-year increase of 100%-160%, mainly due to strong downstream demand driving a significant increase in orders, leading to a substantial rise in the company’s revenue, suggesting that the annual performance is likely to continue to grow rapidly.
Breakthroughs in multiple military fields, included in the category of active devices for military electronics, following the growth logic of military electronics
Since its establishment, the company has successively launched airborne, missile, and shipborne products. Currently, airborne products account for the highest share in the company’s business, with proportions of 77.70%, 67.62%, 69.66%, and 81.75% from 2017 to the first half of 2020, respectively. Additionally, missile products have seen rapid development in recent years, with a proportion of 17.23% in 2019, a significant increase from 3% in 2017. We believe that the company’s advantages in the airborne field will remain, while the missile field is expected to become a major growth point in the future. Overall, the increasing use of embedded computers in weapon systems will drive the company’s continuous high growth.
The “14th Five-Year Plan and Vision 2035” outlines that during the 14th Five-Year period, our military must comprehensively strengthen training and preparation, establish new milestones for military construction targets by 2027, accelerate weapon upgrades, and speed up the development of intelligent weapons, along with the accelerated development of strategic disruptive weapon systems, and the integration of mechanization, informatization, and intelligent development. The next generation of weapon systems is expected to achieve high prosperity during the 14th Five-Year period and by 2035, with military electronics expected to serve as a major implementation carrier for informatization in various new types of equipment during the 14th Five-Year period, possessing dual logic of increasing unit equipment value and equipment production scheduling. Industry trends reference other mature fields of informatization, such as the application trends of electronic components in smartphones and automobiles. We believe that the company’s products can be classified as active devices in military electronics, and are likely to see continuous high growth during the 14th Five-Year period, driven by both the increase in the volume of downstream weapon systems and the enhancement of informatization.
Profit Forecast and Rating:As a core supplier of military embedded computers, the company is expected to see the missile field become a new growth point based on stable development in the airborne field. With the development of informatization and intelligentization of weapon systems, the demand for embedded computers may increase significantly, and the company is expected to achieve long-term rapid growth.In summary, we estimate that the operating income for 2021-2023 will be 442 million / 603 million / 828 million yuan, and the net profit attributable to shareholders will be 121 million / 173 million / 235 million yuan, corresponding to EPS of 2.42 / 3.46 / 4.70 yuan, and PE of 51.10 / 35.78 / 26.35x, initiating coverage with a “Buy” rating.
Risk Warning:Risks of fluctuations in military orders; risks of changes in product prices and gross profit margins; risks of high customer concentration, etc.
1. Core Supplier of Military Embedded Computers, Comprehensive Product Line Drives Continuous Development
1.1. Comprehensive Product Model Line,Expected to Enter a Rapid Development Phase
Since its establishment, the company has focused on the research and development of military embedded computer products, providing customized products and solutions based on customer needs, mastering the core technologies of various military embedded computer modules. Headquartered in Chengdu Qingyang Industrial Park, with offices in Northwest, North China, and East China. The company was originally established in 2002 as “Chengdu Real-Time Digital Equipment Co., Ltd.”, renamed “Chengdu Zhimin Technology Digital Equipment Co., Ltd.” in 2004, and restructured to “Chengdu Zhimin Technology Electronic Co., Ltd.” in 2016, listed on the Sci-Tech Innovation Board of the Shanghai Stock Exchange on April 8, 2021.
Military Product Applications are Widely Distributed, Products Meet Various Application Scenario Needs.Through nearly twenty years of accumulation, the company’s products and solutions have covered data acquisition, signal processing, data processing, communication switching, interface control, high-reliability power supply, large-capacity storage, and graphics image processing. The company’s main products are embedded computer products used in the military field, utilizing high-performance, low-power core processors, incorporating anti-jamming design, compact design, reliability design, and special process treatment, embedded in weapon systems in the form of modules and plugs, executing one or more specific tasks. Due to their small size, light weight, low power consumption, high reliability, strong real-time performance, and ability to adapt to harsh environments, they are widely used in airborne, missile, vehicle-mounted, and shipborne weapon systems, completing various military tasks such as reconnaissance, communication, countermeasures, search, identification, targeting, and attack, thereby enhancing the intelligence and combat effectiveness of the weapons.
1.1. 2017-2020 Compound Annual Growth Rate of 53.2%, Gross Margin Level Maintains High
Revenue growth remains stable, net profit attributable to shareholders is expected to continue to grow significantly. In 2020, the company achieved operating income of 325 million yuan, a year-on-year increase of 24.6%, with a compound annual growth rate of 23.87% from 2017 to 2020; net profit attributable to shareholders was 86 million yuan, a year-on-year increase of 43.9%, with a compound annual growth rate of 53.20%. In recent years, the performance has shown a rapid upward trend. Additionally, in Q1 2021, the company achieved operating income of 54 million yuan, a year-on-year increase of 60.92%; net profit attributable to shareholders was 9 million yuan, a year-on-year increase of 489.24%. Due to the significant seasonal fluctuations in the company’s fundamentals, the quarterly performance historically tends to improve with the recognition of revenue. We believe that as the informatization and intelligentization of weapon systems improve, the company, as a core supplier of military embedded computers, is expected to continue to develop. The company has released its 2021 H1 performance forecast, expecting a net profit of 31.93-41.51 million yuan, a year-on-year increase of 100%-160%, mainly due to strong downstream demand, a substantial increase in orders, leading to a significant increase in the company’s revenue, suggesting that the annual performance is likely to continue to grow rapidly.
Gross Margin Mainly Affected by Product Structure, Period Expense Rate Shows Continuous Decline Trend.In 2020, the company’s gross margin was 62.80%, an increase of 2.19 percentage points compared to 2019; ROE was 26.06%, a year-on-year increase of 3.27 percentage points. In 2019, both gross margin and net margin saw significant declines, which we believe was mainly due to changes in product structure, especially the changes in the airborne product structure leading to fluctuations in gross margin. In the future, gross margin is expected to maintain a high level. In terms of period expense rate, the company’s period expense rate was 34.30% in 2020, down 4.43 percentage points compared to 2019. In recent years, the company’s period expense rate has decreased from 53.12% in 2017 to nearly 20 percentage points, with all expense rates showing a downward trend. We believe that the period expense rate is expected to continue to decline, and the company’s cost control capabilities are continuously improving.
2. Breakthroughs in Multiple Military Fields, Competitive Advantages Becoming More Pronounced
The company is involved in the hardware layer, driver layer, and application layer of embedded computers. Embedded computers can be divided into four layers: hardware layer, driver layer, operating system layer, and application layer. The company mainly completes the design and production of the hardware layer, as well as the design and programming of the driver and application layers. In the hardware layer, the company selects components and designs schematics based on specific user requirements; in the driver layer, the company’s main work is for software engineers to write hardware peripheral driver programs according to customer functional requirements, which is a key link for the company’s products to function; in the application layer, the company writes application layer programs independently. The company’s embedded computers are embedded as modules or components within weapon systems, and multiple embedded computer modules can be integrated into weapon systems. We believe that the demand for embedded computers in new intelligent and informatized weapon systems is expected to increase significantly, and the company may continue to benefit.
The company’s products cover airborne, vehicle-mounted, missile, and shipborne fields, with a comprehensive product line expected to achieve continuous development. According to downstream application fields, airborne products account for the highest share in the company’s business, with proportions of 77.70%, 67.62%, 69.66%, and 81.75% from 2017 to the first half of 2020, respectively. Additionally, missile products have seen rapid development in recent years, with a proportion of 17.23% in 2019, a significant increase from 3% in 2017. The company’s embedded computers can achieve eight major functions: data acquisition, signal processing, data processing, communication switching, interface control, high-reliability power management, large-capacity storage, and graphics image processing, depending on the demands of downstream application fields. We believe that the company’s advantages in the airborne field will remain, while the missile field is expected to become a major growth point in the future. Overall, the increasing use of embedded computers in weapon systems will drive the company’s continuous high growth.
China Electronics Technology Group is the company’s largest customer, with significant advantages in industry competition. In the first half of 2021, the company’s top five customers were the China Electronics Technology Group, China Aviation Industry Group, China Electronics Information Industry Group, China Ordnance Industry Group, and Unit H, accounting for 97.63%. The top five customers accounted for 92.72%, 94.46%, and 94.77% from 2017 to 2019, respectively, maintaining high concentration, and the largest customer in recent years has always been the China Electronics Technology Group, indicating that the company’s downstream customers are relatively stable. In terms of competitors, the main participants in China’s military embedded computer market are units under military industrial groups and some qualified private enterprises, with private enterprises mainly being Leike Defense, Jingjiawei, and Zhongke Haixun, where the company primarily competes with Leike Defense for embedded computers, while Jingjiawei and Zhongke Haixun focus on complete machine products (the company’s products are core components within complete machines). Compared to competitors, the company has the advantage of a complete product variety, adopting a modular design in its designs and focusing on the application of modular results across multiple products.
Foundation for Development During the 14th Five-Year Plan: Upstream military electronics are the foundational support for the leapfrog development of our military equipment, as new weapon systems enter a critical mass production breakthrough period, key core technology breakthroughs and significant growth in downstream demand will drive the volume of military electronic products. The “14th Five-Year Plan and Vision 2035” outlines that during the 14th Five-Year period, our military must comprehensively strengthen training and preparation, establish new milestones for military construction targets by 2027, accelerate weapon upgrades, and speed up the development of intelligent weapons, along with the accelerated development of strategic disruptive weapon systems, and the integration of mechanization, informatization, and intelligent development. The next generation of weapon systems is expected to achieve high prosperity during the 14th Five-Year period and by 2035, with military electronics expected to serve as a major implementation carrier for informatization in various new types of equipment during the 14th Five-Year period, possessing dual logic of increasing unit equipment value and equipment production scheduling. Industry trends reference other mature fields of informatization, such as the application trends of electronic components in smartphones and automobiles.
Military Electronics Q1 2021: Revenue of 12.272 billion yuan (+66.12%), net profit attributable to shareholders of 2.490 billion yuan (+136.87%), net profit margin of 20.29% (+6.06 percentage points), contract liabilities + advance receipts increased by 64.64% year-on-year. As an upstream industry chain, the performance release rhythm is ahead, and with a significant increase in downstream demand in the second half of 2020, the performance in 2020 has already seen significant growth. Q1 2021 performance is still up 26.44% compared to Q4 2020, indicating that the industry’s prosperity continues to improve, and the increase in inventory and contract liabilities indicates that upstream enterprises have sufficient orders and are actively preparing for production. We believe that the company’s products can be classified as active devices in military electronics, and are likely to see continuous high growth during the 14th Five-Year period, driven by both the increase in the volume of downstream weapon systems and the enhancement of informatization.
3. Issuing Equity Incentive Plan, Net Profit Compound Growth Rate Needs to Exceed 26% in the Next Three Years
The company has issued its first equity incentive plan, demonstrating confidence in continuous development.On June 22, the company announced its first equity incentive plan, planning to grant 1.0606 million restricted shares to incentive objects, with a grant price of 34.50 yuan per share, of which the first category of restricted shares is granted to senior executives with 335,600 shares, and the second category of restricted shares is granted to core backbones with 725,000 shares. The unlocking conditions are based on the net profit of 2020, requiring growth rates of no less than 40%, 70%, and 100% from 2021 to 2023, corresponding to a compound growth rate of 26%.
4. Zhimin Technology Profit Forecast and Valuation
As a core supplier of military embedded computers, the company is expected to see the missile field become a new growth point based on stable development in the airborne field. With the development of informatization and intelligentization of weapon systems, the demand for embedded computers may increase significantly, and the company is expected to achieve long-term rapid growth.In summary, we estimate that the operating income for 2021-2023 will be 442 million / 603 million / 828 million yuan, and the net profit attributable to shareholders will be 121 million / 173 million / 235 million yuan, corresponding to EPS of 2.42 / 3.46 / 4.70 yuan, and PE of 51.10 / 35.78 / 26.35x.
Using the PE method for comparable valuation to predict target price. According to the competitors disclosed in the company’s prospectus, we select Leike Defense, Jingjiawei, and Zhongke Haixun for comparison. According to Wind’s consistent expectations, the three comparable companies’ estimated PE for 2021 are 43.7/82.5/54.7x, with an average of 60.3x. The company’s current estimated PE for 2021 is 51.10x, and the target price calculated at a valuation of 65X is 157.44 yuan, giving a “Buy” rating.
5. Risk Warning
5.1. Risk of Fluctuations in Military Orders
Due to specific needs of end users and their annual procurement plans, and the significant adjustments in procurement volumes due to national defense needs, there may be sudden increases or delays in orders. The specific projects and quantities of orders are subject to fluctuations, and delivery times can be uneven.
5.2. Risk of Changes in Product Prices and Gross Profit Margins
In the future, if market competition and military price reviews lead to a decline in product prices, it may affect the company’s gross margin levels.
5.3. Risk of High Customer Concentration
The company’s business development is mainly influenced by the overall planning of the national defense informatization system. If the overall development policies of the military industry and the overall budget for the national defense informatization system change in the future, leading to a significant decrease in product demand from military industrial group units, it will adversely affect the company’s performance.
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Core Enterprises in the Industry Chain Profit Forecast for 2021-2023 (Forecast Values are Wind Consistent Expectations)
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Key Report for 2021:
1. H2 Investment Strategy: Entering the Investment Era of Military Fundamentals, Short/Medium/Long-Term “Three Confirmations” Thinking
2. Commentary on the Special Integrated Circuit Industry: Domestic Replacement Combined with Weapon System Volume, Special Integrated Circuits are Expected to Become the Best Track of the 14th Five-Year Plan
3. Military Industry Full Industry Mid-Year Forecast: Focus on Fundamentals + New Model Pipeline Progress
4. In-Depth: Summary of Global Defense Development in 2020
5. Core Recommendation – AVIC Shenyang Aircraft Corporation: Pricing Mechanism Reform or Landing, Fighter Jet Leader Takes Off, Pipeline Improvement Expected to Further Release Performance
6. 2021 “August 1” Politburo Study Outlook: National Defense Equipment Construction Expected to Further Deepen
7. Core Recommendation – Beimo High-Tech: Landing Gear Business Achieves Breakthrough, Maintenance Business Grows Significantly
8. Core Recommendation – Fushun Special Steel: Net Profit Year-on-Year +126%-145% Achieves Exceeding Expectations Growth, Industry High Prosperity Highlighted
9. Core Recommendation – AVIC Electromechanical: Related Transactions Expected to Be Significantly Adjusted to Realize Industry High Prosperity, Electromechanical Leader Steady and Far-Reaching
Note:The content in this article is based on publicly released research reports from Tianfeng Securities Research Institute. For specific report content and related risk warnings, please refer to the complete report.
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Securities Research Report |
Zhimin Technology: Military Embedded Computers Comprehensive Layout, Missile Field Expected to Become Core Growth Point |
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Release Date |
July 26, 2021 |
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Report Issuing Institution |
Tianfeng Securities Co., Ltd. |
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Report Analysts |
Li Lujing SAC License Number: S1110519050003 Liu Mingyang Contact: [email protected] |
